Finmeccanica, Europe's fourth-largest aerospace and defense company, has approached DRS Technologies, proposing a takeover bid of as much $5.41 billion, sources close to the matter told Reuters.
The board of Finmeccanica, in which the Italian Treasury has a nearly 34 percent stake, met Monday to discuss the planned takeover of the U.S. defense technology firm, one source said.
DRS' board was also meeting on the matter, another source said.
DRS has said it is in talks about a potential deal, but has not identified the company or companies interested.
Italian daily Il Sole 24 Ore said Finmeccanica was ready to spend 3.5 billion euros ($5.41 billion) for the Parsippany, N.J., company that supplies products such as radar and surveillance to military forces and intelligence agencies.
Finmeccanica declined to comment on the latest proposal.
A financial source told Reuters the bid could be between 2.5 billion and 3.2 billion euros.
A Finmeccanica bid would be a further sign of European companies' hunger for a share of the growing U.S. defense market, which accounts for one-half the world's military spending.
It is unclear whether the offer would be friendly or hostile, with other sector players interested in DRS as well.
Airbus parent firm EADS is seriously examining the possibility of bidding for DRS, Ralph Crosby, chief executive of EADS North America, said on Friday.
DRS shares jumped 3.2 percent to $77.19 on the New York Stock Exchange Monday. The stock edged to $77.25 in extended electronic trading.
Finmeccanica shares closed down 0.37 percent to 21.36 euros as analysts were positive on the deal but raised questions about its financing.
"The U.S. group is a perfect target for Finmeccanica ... However, the size of the acquisition would probably require a capital increase to seal financing," Oddo Securities said in a note.
One source close to the matter said Finmeccanica could seek a 2 billion euro capital hike via the issue of convertible bond, but another denied this possibility.
An alternative would be to finance the acquisition via a loan.
Finmeccanica's board already received approval from shareholders last year to increase capital by as much as 10 percent by June 2009 for "special needs" or acquisitions.
Such a capital hike would slightly dilute the Italian Treasury's stake in the company, but that stake is expected to remain above 30 percent.
In March, Finmeccanica told analysts it had 4.2 billion euros available for acquisitions by 2010.
With defense spending in Italy in decline for several years, growth overseas has become a necessity. Finmeccanica has sealed a wide range of foreign contracts, and its AgustaWestland unit is the world's second-biggest helicopter maker.
Morgan Stanley analysts said in a research note last week the deal would boost Finmeccanica's defense electronics capabilities and give it key local presence in the United States.
But they warned the company would be buying U.S. assets right before a likely peak in the defense budgets and in a U.S. election year.
Finmeccanica is also considering buying 10 percent to 15 percent of Italian electronic company Eurotech for up to 38 million euros, the two sources close to the matter said.
That acquisition would also be evaluated by Finmeccanica's board during the meeting that is under way, the sources said.